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Too Many Homes are Still Underwater

In 2005, Rodney Conway and his wife, Vicki, paid $340,000 for their 950-square-foot two-bedroom home in Richmond, California, a blue-collar city in the Bay Area. Today the home is worth about $140,000. But the couple still owes $320,000 and makes monthly mortgage payments to the Bank of America. “We’re basically renting this house for $2,000 a month,” said the 52-year-old Conway, who was disabled while serving on a Navy ship in Lebanon in 1983.

With her office job and his disability income, the Conways can barely make ends meet. “We don’t take trips or go to restaurants. We just went to a movie for the first time in a year,” said Conway, who spent twenty-six years as a letter carrier before being laid off in 2009. “I’d like to be able to give my wife a nice birthday present, but I can’t afford it.”

In almost every part of the country, entire neighborhoods — and in some cases, whole cities — are underwater. They are not victims of natural disasters like Hurricanes Katrina and Sandy. Like the Conways, they are drowning in debt, victims of Wall Street’s reckless and predatory lending practices.

Since 2006, when the speculative housing bubble burst, home prices have plummeted; homeowners have lost more than $6 trillion in household wealth. Many now owe more on their mortgages than their homes are worth. Despite rising home prices in some parts of the country, more than 11 million American families — one-fifth of all homeowners with mortgages — are still underwater, through no fault of their own. If nothing is done, many will eventually join the more than 5 million American homeowners who have already lost their homes to foreclosure.

The nation’s worst underwater “hot spots” — disproportionately black and Latino areas — are places that banks targeted for predatory lending, often pushing borrowers into high-interest, risky loans, even when they were eligible for conventional mortgages. Many have lost their jobs or seen their incomes fall as a result of the recession and are having difficulty paying the bills.

Dallas, Las Vegas, Miami, Houston, San Bernardino, Tampa, Jacksonville, Phoenix, Atlanta, Orlando, Stockton, Reno, Modesto and Detroit are among the most troubled “hot spots,” but there are many other communities with huge inventories of underwater mortgages and where home prices are not participating in the recovery.

The problem is contagious. Communities with many underwater homes bring down the value of other houses in the area. Foreclosures alone have drained at $2 trillion in property values from surrounding neighborhoods, according to a Center for Responsible Lending study. The resulting decline in property tax revenues has plunged some cities into near-bankruptcy, lay-offs and cuts to vital public services.

Many economists, including Joseph Stiglitz and Mark Zandi, agree that the best solution is “principal reduction,” where banks lower the borrower’s mortgage principal. This is not an act of charity but a way to reverse the economy’s freefall. If underwater mortgages were reset to fair-market values of homes, it would help homeowners and communities alike, and pump about $102 billion into the economy annually, according to a Home Defenders League report.

But homeowners who have asked banks to modify their mortgages typically get a cold shoulder or a bureaucratic runaround. So far, the Obama administration and Congress have been unwilling to require intransigent banks to reset loans.